http://www.businessweek.com/articles/2013-10-02/silk-roads-demise-sinks-bitcoin-value-and-saves-bitcoins-reputation

Bitcoin

The End of the Internet's Biggest Black Market Is Good for Bitcoin


The End of the Internet's Biggest Black Market Is Good for Bitcoin

Photograph by George Frey/Bloomberg

For most of its brief existence, Bitcoin has been widely associated with Silk Road—the anonymous cybercurrency, naturally enough, wound up backing transactions on the shadowy online market for drugs, hacking services, and other illegal activities. So it makes sense that the value of Bitcoin would fall off a cliff as news broke that the FBI had arrested a man suspected of running the most famous online black market. The value of Bitcoin dropped to about $110 by early Wednesday afternoon, down from $140 earlier this morning.

But people in the more legitimate corners of the Bitcoin world believe the apparent demise of Silk Road is the best thing that could happen to the currency. “I think it’s a huge positive,” says Fred Ehrsam, the co-founder of Bitcoin startup Coinbase. “This kind of takes the biggest target that people might speak negatively about when it comes to Bitcoin, and takes it off the map.”

According to a recently unsealed FBI complaint, Ross William Ulbricht had been running Silk Road from January 2011 until agents tracked him down in a San Francisco apartment this summer. Ulbricht named himself the Dread Pirate Roberts, after the character in The Princess Bride, and the FBI complaint describes his alleged role overseeing a small staff that kept the network running. Earlier this year he paid for the murder of someone who was threatening to release the names of thousands of Silk Road users, according to the complaint, and Ulbricht is quoted through correspondence suggesting the murder actually happened (although the FBI could find no evidence).

All economic activity on Silk Road was conducted in Bitcoins, a digital currency designed to obscure the identities of the people using it. Silk Road users could also access the service only through Tor, a tool for anonymous web use. Silk Road facilitated transactions totaling 9.5 million Bitcoins since January 2011, taking in more than 600,000 Bitcoins in commissions in the process—valued by the FBI, using recent prices, at $80 million in commissions on $1.2 billion in sales. This probably overstates the actual level of transactions, however, given the huge increase and wild fluctuations in Bitcoin’s value over that time.

Ulbricht’s arrest led to one such swing. On Wednesday the price of Bitcoin on Mt. Gox, the largest exchange where users can convert it into more traditional currencies, quickly dropped about 20 percent. But Bitcoin quickly worked its way back up, regaining more than half its losses in the afternoon. Just after 4 p.m., it was trading at about $127.

The presumed end of Silk Road is a big test for Bitcoin, says Jerry Brito, director of the technology research program at Mercatus Center at George Mason University, who has studied the currency. If its appeal doesn’t extend beyond a way to hide your identity in online drug transactions, then this could mark the end of its run and the value should drop accordingly. But Brito and other proponents see Bitcoin primarily as a way to lower the transaction costs associated with legitimate online commerce. If the market quickly recovers, it bolsters their argument by showing that demand won’t drop off once the best way to buy cocaine with Bitcoin disappears. The fact that Silk Road, for all the attention paid to it, accounted for only about 4 percent of the overall Bitcoin trade suggests that the market will do just fine.

The FBI’s ability to bust Ulbricht doesn’t so far seem to have undermined the reputation of Bitcoin as a haven of anonymity, another rationale for its use even on legal purchases. There is nothing in the FBI’s complaint to suggest that agents exploited a weakness in the currency’s secure code during the Silk Road investigation. Instead, the FBI said it gained access to computer servers used by the black market and tracked Ulbricht through forensic analysis of those machines. (Still, whether Bitcoin is truly anonymous is increasingly coming into question.)

If the government can catch Bitcoin-using criminals without compromising the currency itself, that should dampen the impression that there is something uniquely nefarious about it, and Brito suggests that could give Bitcoin a leg up with skeptical banking regulators. “We can see from the Silk Road seizure that the system works and that law enforcement can address this,” says Brito. “There’s nothing special about Bitcoin.”

Brustein is a writer for Businessweek.com in New York.

Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus